In light of the recent pre-announcements from auto parts manufacturers such as American Axel and Lear, a good short idea might be Gentex (GNTX). It’s not undiscovered since 10% of the float is already sold short but I think it could still work since many current holders of the stock are complacent because GNTX has done so well for so long.
Gentex manufactures automatic-dimming rearview mirrors. The company had a virtual monopoly in the area because its mirrors are the highest quality and lowest cost. The company is literally the brightest light in an industry filled with highly leveraged companies and tremendous overcapacity. The company’s return on equity and margins resemble an internet company, not an auto parts manufacturer.
However, right now, the stock looks like a highly valued, cyclical growth story where the estimates are falling quarter after quarter.
What is most troublesome is that 38% of the revenues come from GM which has a horrid line up of new cars. While the company is getting market share in Japanese manufacturers, it’s at a lower margin than in US manufacturers. In addition, GNTX is finally seeing some competition from Magna Donnelly and that could also be contributing to the margin erosion.
The Smith Barney analysts on GNTX implies in a recent research note that the company has not been buying back shares despite the fact that it has so in the past in the low $30s.
The valuation appears rich relative to the industry and relative to its reduced growth expectations. The stock trades at 5x sales and a PE to growth ratio of 1.5x. The forward P/E is 19x – which could go higher if the company has to reduce earnings expectations this year. That compares to the auto parts group which, according to Yahoo, trades at .7x sales and a trailing (not forward) P/E of 18x.
So while GNTX is the creme of the crop in the auto parts industry, I think the stock has pretty dim prospects in the near term.
